The state of or the ease with which a
currency may be exchanged for a foreign currency. Currency convertibility is vitally important in the
foreign exchange market; higher convertibility means that a currency is more
liquid and, therefore, less difficult to
trade. Factors affecting convertibility include the availability of foreign currency reserves in a given country and domestic regulations seeking to protect local
investors from bad
investment decisions in, say, a currency undergoing a period of
hyperinflation. A few socialist governments even
issue inconvertible currencies, such as the
Cuban peso, in order to protect their citizens from perceived
capitalist infiltration. See also:
Inconvertibility.